The relationship between public expenditures and tax revenues: An evaluation before and after the pandemic

Abstract

Due to the increases in public expenditures before the pandemic, budget deficits were experienced in Turkey. After the pandemic, there was a decrease in production with the curfews and tax revenues decreased until June 2020.  However, there was an increase in tax revenues afterwards. Despite the increased tax revenues in this period, the budget deficit continued as public expenditures increased.

The main purpose of this study is to test the relationship between public expenditures and tax revenues in Turkey with the help of quarterly data for the period 2006:Q1-2020:Q1 and to determine which of the 4 hypotheses (tax-spend, spend-and-tax, fiscal synchronization, institutional seperation hypothesis) on the relationship between public expenditures and tax revenues is valid for Turkey. In the study, a long-term cointegrated relationship was found between the variables. In the causality test, one-way causality was determined from public expenditures to tax revenues. As a result of this study, it has been determined that the spend-tax hypothesis is valid in Turkey in the periods discussed. According to the DOLS estimator results, a 1% increase in public expenditures increases tax revenues by 0.97%. According to these results, the way to reduce the budget deficit is to reduce public expenditures. As in Barro's study, increases in public expenditures were seen as the reason for the increase in taxes in this study.